Refinance Your Mortgage and Pay the Same Amount? A Calculator to Determine if it’s Worth It!

There is a mortgage strategy variously described in different corners of the internet where a mortgage is refinanced… and payments stay steady. For this strategy, a borrower is currently paying some monthly payment, and will continue to pay the exact same monthly payment after their mortgage is refinanced. The benefits are usually explained as an acceleration of mortgage payments and a “guaranteed investment return”. You may find yourself in a situation where you are considering this form of accelerated mortgage payments. Is it worth it? Let’s run the numbers and find out!

Is it a Good Idea to Accelerate Payments?

At its most basic, this calculator is all about calculating the value of accelerated payments. Prepaying your mortgage does have a dramatic value – but a huge number over a huge number of years doesn’t necessarily mean a good deal! Oftentimes, you are better off refinancing and investing the money saved somewhere other than your mortgage.

Explanation of Return

When people talk about guaranteed return, the rate that is accepted is usually that of US Government Securities. On

Nice House! (Image: seier+seier)

9/30/11, 30 year treasuries sat at 2.90%, 20s at 2.66% and 10s at 1.92%. Since people looking to refinance usually find themselves in one of these categories for years remaining, checking the yield curve gives you a good idea of what return you could get if you instead applied the extra payments to US Treasuries. With that in mind, here’s how the calculator calculates this yield (‘tax rate’ gives an estimate of the tax deductibility of the mortgage. This may change, and remember mortgage interest may change your marginal tax bracket. You also need to have more deductions than the standard deduction!):

(Tax Adjusted Total Cost of Old Mortgage – Tax Adjusted Total Cost of New Mortgage )/Tax Adjusted Total Cost of New Mortgage/ Original Mortgage Payments Remaining / 12

So, without further ado, the calculator (to our readership: the concept is the same everywhere, but this calculator is for American fixed-rate mortgages):

Mortgage Information
Input Data	Values
Remaining Principal Balance
Interest Rate (%)
Current Mortgage Term (Years)
Current Monthly Mortgage Payment ($)
Current Marginal Tax Bracket (% – Used to Estimate Investment Return)
New Mortgage Interest Rate
New Mortgage Term (Years)

Mortgage Comparison and Post-Tax Return
Calculated Results	Values
Payments Remain, Old Mortgage
Payments Remain, New Mortgage
Total Cost, Old Mortgage ($)
Total Cost, New Mortgage ($)
Implied Post Tax Return (Annual %)
Status

Code created with assistance from Political Calculations

‘Status’ should only bother you with an illegal input. Implied Post Tax Return is the important field here: it’s the annual return (arithmetic average yield) guaranteed by paying off your mortgage. It’s not all bad – that’s an after tax return, since debt is paid with post-tax money (description here).

Anyway, the strategy is usually dubious, unless you’re sitting on a very expensive mortgage. For more explanation of why paying off a mortgage isn’t always the best financial decision (there are definitely non-financial arguments), read one of the links provided – they also contain arguments for the payoff.

Sources

Thanks to Political Calculations for the calculator script!

Thanks to Hugh Chou for the infinitely useful equations derived on your site!